Annuity rates expected to rise for second successive year

Annuity rates are on track to increase for the second year in a row, following positive results in the first half of 2018.

Two consecutive annual annuity rate rises have not been seen since 2006 and 2007, but 2018’s H1 results suggest that could be about to change. The Moneyfacts UK Personal Pension Trends Treasury Report revealed an increase of 1.4 per cent to 4.8 per cent in H1 2018.

Annuity rates have recovered well since falling to the lowest level on record in September 2016 and rates also increased by 0.6 per cent on average between Q1 2018 and Q2 2018.
All of these figures are based on a £10,000 pension pot without guarantee for an individual aged 65.

Moneyfacts, head of pensions, Richard Eagling, said: “Despite their much-reduced popularity, annuities remain the only at-retirement product that enables individuals to insure against investment and longevity risk.”

However, the report also found that the older the pensioner, the smaller the increase in annuity rate.

Those opting for a standard level without guarantee annuity at 65 years old witnessed an annual income increase of between 0.6 per cent and 1.2 per cent, while those aged 70 saw a rise of only 0.5 per cent to 1 per cent, and those aged 75 saw an increase of a maximum of 0.3 per cent.

Eagling is also concerned that the low spread between the highest and lowest annuity incomes could discourage consumers from hunting for the best deal, as it fell to an all-time low of 3.4 per cent during Q2 2018.

“While the narrower annuity income spread arguably reduces the risk of consumers locking themselves into poorer-value annuity rates,” explained Eagling, “it does raise the possibility that individuals could become complacent, and view a 5 per cent difference as not being enough of an incentive to shop around.”

Despite this, the average annual annuity rate is forecast to keep rising in H2 2018 as the post-Brexit recovery continues.

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